Reforms have been taken up in right earnest: Narasimhan

I fully endorse the Reserve Bank of India governor's stand in that he has resisted the temptation of bringing down the cash reserve ratio (CRR) or the bank rate in Friday's Mid-Term Review of Monetary and Credit Policy for 1998-99. The current economic scenario and liquidity in the system do not warrant it at all. I would like to congratulate the RBI on its prompt acceptance of the prudential norms recommended by the second Narasimham Committee. The reforms have been taken up in right earnest and we are moving steadily towards the higher norms as recommended by the committee earlier this year.

However, there are one or two more issues that could be taken up. For example, the zero risk weight for both central and state government guaranteed advances (except for governments which continued to be defaulters as on March 31, 2000 when it goes up to 20 per cent, and for those who remained defaulters on March 31, 2001, when it goes up to 100 per cent) seems to be taking us back where we were. Some risk weightageshould have been assigned even in the first year, especially when the weightage for market risk on government and approved securities is going to be 5 per cent, to be increased in a phased manner. I endorse RBI's decision to ascribe this 5 per cent risk weightage to government securities. The decision to assign 100 per cent risk weight on foreign exchange open position limits is also a good one.

The other point worth noting is that while a minimum target of 9 per cent capital adequacy ratio (CAR) to be achieved by March 2001 (with a decision about a further limit enhancement to be taken later) is a step in the right direction, banks with international exposure must move to a higher CAR ahead of this deadline. After the south-east Asian crisis, market observers the world over are looking at us critically to see whether they can detect chinks in our armour. We should not leave any latitude for them to comment that we are lagging behind. Rather, we should seize this opportunity to strengthen internationalconfidence in our country and in our financial sector.

There are some steps we could take towards this. For instance, where instances of evergreening are detected in banks and financial institutions there should be no leniency. Rather, penal action should be taken by way of a deterrent.

Another suggestion I would like to make is that there should be no dilution in the definition of non performing assets (NPAs). A distinction must be made between company-specific NPAs, which are often on account of poor corporate management, and recession-induced business cycle NPAs which are short term in nature and will disappear. In the case of recession-induced business cycles NPAs one can afford to take a slightly lenient view. For example, there need be no provisioning for six months, during which time, however, there is a necessity to keep a strict watch.

The RBI governor has spoken about a need for a phased disclosure of the maturity pattern of assets and liabilities, NPAs, concentration ratios of banks' exposureto certain industries as also to sectors which are sensitive to asset price fluctuations. While the policy indicates that further instructions on disclosures will be issued later, they need to be implemented as soon as possible.

These measures will doubtlessly help correct systemic deficiencies. But the government needs to follow the RBI's measures up with a corresponding set of measures which will correct structural deficiencies in the system. I know these are not within the power of the RBI. For example, take the issues of dilution of government holding in banks, mergers and the problem of weak banks. If the government cannot re-capitalise banks, they have to go to the market for raising capital. What is the government's stand on dilution of its holdings in banks? What about weak public sector banks? The government has to ascertain which of these banks is revivable. If a bank is beyond revival, then we must think of closure. The temporary pain this will cause will be compensated by the long term benefitwe will reap. Let us consider ourselves lucky to have escaped the contagion. I do not want India to be the next domino.